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Doing Business in Hungary

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A couple of pages about the current investment climate in Hungary

A couple of pages about the current investment climate in Hungary


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  • 1. Hungary - A Guide to Doing Business YINGKE VÁRNAI Law Firm Montevideo u. 10 1037 Budapest Hungary T: +36 1 887 8288 F: +36 1 887 8381 www.yingkevarnai.eu
  • 2. Introduction to HungaryExtending just over 93 thousand square kilometers, surrounded by the Carpathians, the Dinara Mountains and the lowerAlps and where the Danube river winds through the country, Hungary lies in Central Europe (within the Schengen zone),with Slovakia, the Ukraine, Romania, Serbia, Croatia, Slovenia and Austria as its neighbors. As Hungary is the geographicalcenter of Europe, its strategic location is one of Hungary’s most important benefits, whether investors are seekingopportunities within the country itself or are looking to further expand throughout Europe. This is a region characterizedby dynamic economic development, whose growth is driven forward by increasingly high industrial output, excellentexport and import potential and a growing domestic market.Hungary is not just about goulash and paprika. Hungary is one of the oldest countries in Europe, founded way back in theyear 896. Interestingly, Hungary belongs to the group of countries, which has a relatively high amount of Nobel PrizeLaureates according to per capita index, ranging from Albert Szent-Györgyi (of Vitamin C’s discovery fame) to Imre Kertészin the literature field. The helicopter, Rubiks cube, holography, ballpoint pen, theory of the hydrogen bomb, safety match,binoculars and the krypton electric bulb were all invented by Hungarians.Hungary always had a strong tradition of playing the role of a pioneer economically and politically in the former SovietUnion bloc. Even before the fall of the Soviet Union, Hungarian legislation was the first in the bloc to allow for privateentrepreneurs to start small businesses. Following the country’s accession to the European Union in 2004, Hungarycontinues to be one of the central European hub of innovation. It was one of the quickest country in the Eastern Block toopen its market to foreign capital and has eased capital and profit repatriation. Growth and development is furthersupported by the fact that Hungary’s EU membership has strengthened the regulatory system and legal environment toensure a transparent and stable operating environment.Despite the recent economic crisis, Hungary still presents itself as an attractive business location with great growthpotential, especially in the areas of export and foreign direct investment. Hungary definitely benefits from being a memberof the European Union. According to the Hungarian Investment and Trade Development Agency, Hungary is the recipientof EUR 22.5 billion from the European Structural and Cohesion Funds of the European Union between 2007 to 2013. Thesefunds will be distributed to enterprises and certain government institutions under the scope of the New HungaryDevelopment Plan, with the aim that Hungary may strengthen its existing capacities, create jobs, promote strongercompetition and eliminate obstacles that hinder economic development. Besides being a regional hub and gateway,Hungary stands to benefit from free movement of labour, goods and services and also access to over 450 millionconsumers. Hungary will be holding the European Union’s rotating presidency next year, starting the 1st of January 2011,armed with the objectives of leading the European Union into becoming a stronger organization with increased internalcooperation and international influence.YINGKE VÁRNAI
  • 3. Establishing a Business in HungaryForeign investments are welcome in Hungary, that is to say, it is encouraged by the Hungarian government by differentsubsidies and tax allowances. There are several government and EU aids available for investors, in order to create new jobs,encourage competitiveness, develop the infrastructure system, or to protect the environment.According to the Hungarian laws, no special permit is required to found a business association; natural and legal entities ofHungarian and foreign nationalities are equally allowed to establish a business enterprise. Even a single person can found ajoint-stock company, or a limited liability company; the only limitation is that the headquarters of such companies must belocated within the territory of Hungary. If the owner /shareholder is a natural entity, the following data has to be provided:name; date and place of birth; mother’s name; current address (in China); tax number and authentic copy of passport. Incase the owner is a company, it is necessary to submit its official and authentic company extract officially translated toHungarian, or the deed of association; authentic and official specimen signature of the company manager.Business associations as well as commercial representative offices and branches are registered by the competent court ofregistry. In order to register a company, an electronic application has to be submitted within 30 days from the conclusion ofthe Articles of Association. It is necessary to have legal representation through the registration procedure.If the company uses a sample deed of association (according to the Act V of 2006), the registration can be done in only onebusiness hour, otherwise the procedure takes 15 business days (if the company does not use the sample deed). A newlyregistered company must also register with the local municipality, State Taxation Office, Central Statistical Office and SocialSecurity Authorities.There are two kinds of companies: those having legal entity, such as the limited liability company and the joint-stockcompany, and those that don’t – general partnership and limited partnership. The most common company forms inHungary are the limited liability companies (korlátolt felelősségű társaság, Kft) and companies limited by share(részvénytársaság) – in private (Zrt) or public (Nyrt) form. No specific restrictions apply to foreign shareholders.With most of the company forms, it is necessary to have a minimal share capital. A Kft must have a minimum share capital ofHUF 500,000 (about USD 2,500) in case of a Zrt it is HUF 5 million (about USD 25,000) and a Nyrt must have HUF 20 million(about USD 100,000). Shares or quotas can be issued for non-cash consideration, including intellectual work, recognizedclaim, or other marketable things of value. It is important to talk about the management structure as well. The managingdirector of the Kft is appointed by the quota holders. If there are more than one managing directors, they can possessindividual or joint right of representation. In the case of Zrts and Nyrts, the companies can be managed by a board ofdirectors, but if it is excluded by the deed of association, only one director can manage the company – in that case themembers of the board of directors are treated as executive officers.YINGKE VÁRNAI
  • 4. Hungary has very skilled and educated labor force of approximately 4.2 million workers. The country has long traditions andhigh standards in many areas, such as medicine, sciences, engineering or economics. Foreign employers find Hungarianemployees extremely flexible, motivated and efficient. Most of young Hungarians speak English and/or other Westernlanguages. In terms of employment laws of Hungary, it is inevitable to mention the Labor Code (XXII:1992), which applies toall employees working in Hungary and to the employees working abroad for a Hungarian employer for a temporary period.The terms of employment have to be incorporated into a written contract. If an international element is present regardingthe employment, the parties are free to choose the governing law, unless it does not result in less favorable terms. Thecontract can be terminated by mutual agreement or ordinary and extraordinary dismissal.Holding a valid work permit is required for foreign employees, unless they are persons from EU member states orSwitzerland, and their relatives. It is also not necessary to have a work permit in the case they are executives of anorganization or they benefit from certain legal provision where a work permit is not mandatory. Obtaining the permit takesabout 30 days and costs HUF 25,000 (USD 135). Prior to submitting the application the employer must certify that there is anactual need for the job to be performed by the foreign employee. The workforce request must be submitted to the relevantlocal Labor Center by the employer prior to applying for a “visa for obtaining residence permit”. From December 21, 2007Hungary has been a member of the Schengen Area, and applies the Schengen regulation in full, meaning visas and residencepermits issued by one of the Schengen States are also valid for Hungary, and vice versa. Foreign nationals requesting entryto Hungary with a purpose of an extended stay (employment, education, etc.) should submit a “visa for obtaining residencepermit”. Successful applicants are provided with a special single-entry visa – valid for 30 days –, so they can enter thecountry and once there, apply for a residence permit.Tax RegulationsThe tax regulations are very pleasant for foreign investors in Hungary. Within the aims of the Hungarian government, theformulation of a business environment that is favorable to the foreign investors is one of the most crucial questions. That iswhy the modification of tax laws was in the first measures of the newly elected government in 2010. From 1st January 2011,Hungary will be one of the countries with the lowest tax rates in the region.The government wants to reach the increase of employment not only with the reduction of corporate and other taxvolumes, but also the offer of wide range of subsidies for those investors who meet the requirements. The Hungariangovernment offers subsidy packages for the projects worth at least EUR 5 million in the less developed regions, and EUR 10million in other regions. These packages could be non-refundable cash subsidy, development tax allowance, job creationsubsidy or training subsidy. The government also provides further tax allowance and regional subsidies in addition to theabove.YINGKE VÁRNAI
  • 5. As a member of European Union, in Hungary the custom duty regulations of the Community are applied. The exports arezero-rated for VAT purposes, but imports are subject of VAT, that is 25% in Hungary. While considering the tax aspects ofinvesting in Hungary, it should also be kept in mind that a double tax treaty was concluded by the Republic of Hungary andthe People’s Republic of China on 17 June 1992.Why is it good for Chinese businesses to invest in Hungary? Central location, good transportation channels in Europe, to Asia No special permit is required to found a business association Issuer of Schengen visa One of the countries with the lowest tax rates in the region Already existing Chinese institutions such as Bank of China, China Investment Promotion Agency, Hainan Airlines Bilingual Chinese-Hungarian school Highest Chinese population in EuropeWhy is it good for Chinese businesses to work with YINGKE VÁRNAI Law Firm? Offices in Budapest, Central and Eastern Europe and in China Partner of one of the most prominent Chinese law firm, YingKe Chinese speaking colleagues in Budapest office as well Experience in working with Chinese enterprises Extended scale of expertise from corporate law to patent lawConclusionDue to the strong relationships that already exist between China and Hungary, the numerous benefits Hungary offers toforeign investment, including its strategic location, and the overall support of the European Union, Hungary provides theideal locale for interested foreign investors. The YINGKE VÁRNAI Law Firm understands the needs of such investors and wascreated to ensure the success of their ambitious plans. In order to learn more about the YINGKE VÁRNAI Law Firm, pleasevisit www.yingkevarnai.eu.YINGKE VÁRNAI